23 Jan Status Paper in Government Debt – Centre is Faring Better than States

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The Status Paper on Government Debt for 2017-18 released by the Department of Economic Affairs showed that the debt-to-GDP ratio of the Central government is on course to achieve the recommendation of N.K Singh committee, but the state governments are lagging behind.

Highlights of The Report

In 2017-18, the total debt as percentage of GDP of Central government fell to 46.5% from 47.5% in 2014.

For the states, it rose to 24% from the same period and is expected to increase to 24.3% in 2018-19.

In terms of money, the total debt of the Central government increased to Rs. 82,35,178 crore in 2017-18 from 56,69,429 crore in 2014.

For states it is 40,22,090 crore in 2017-18 from Rs. 24,71,270 crore in 2014. A total of 63% increase since 2014.

As per the report, State government’s debt obligations increased majorly between 2015-16 and 2016-17. It was 21.7% in in 2015, 23.4% in 2016 and 23.8% in 2017. The increase in these years is majorly attributed to UDAY bonds.

The report also says that by end March 2018, the debt of states was 24% and is likely to reach 24.3% in 2019.

But, the report also points out that the surplus cash with states will enable them to service the debt.

States have invested their surpluses in Cash Balance Investment Account. Drawdown from this will allow to service their debt.

N.K Singh Committee Recommendations

A Fiscal Responsibility and Budget Management (FRBM) Review Committee headed N.K Singh recommended a path for sustainable debt for both Central and State governments.

The Committee recommended a total of 60% for both central and state governments for debt as percentage of GDP.

For the central government, it is 40% and for state governments combined, it is 20%.

Achieving the targets are necessary for better ratings from the credit rating agencies.

Reasons for Increase in States’ Debt

Not achieving revenue collection targets.

Developmental activities.

Increasing expenditure on welfare schemes.

Unchecked borrowing.

Liability due to Uday bonds.

Concerns Over States’ Debt

The central government is achieving the targets by sticking to the fiscal deficit parameters. Even if it deviates a little, it has the wherewithal to service the debt. But for many states increasing debt may cause a debt trap situation.

What are UDAY Bonds?

In the year 2015, the central government has launched a scheme called Ujwal DISCOM Assurance Yojana (UDAY).

The scheme is for distressing power distribution companies from financial owes and make them operationally healthy.

As per the scheme, the state government which owns the distribution company has to takeover 75% of debts of the DISCOM. It issues UDAY bonds to finance the debt. For the rest 25%, DISCOMs are expected to issue bonds.

The scheme is not mandatory but optional. But, all the states and Union Territories of the country have opted for the scheme. Hence the rise in their debts as mentioned above.

Conclusion

Developing countries like India often achieve their development goals with some amount of fiscal deficit. Government’s borrow the money for infrastructure development and welfare needs. But, the borrowing must be at a manageable level. When the deficit widens, it has adverse effects of government capturing private funding, rise in inflation, central bank holding the interest rates etc.

The current scenario warrants that the State governments take a judicious approach in sourcing their funds. Keeping the debt at a manageable level is a prerequisite for credit agencies to give better ratings for the country there by sustaining the flow of foreign capital into the country.

India still needs foreign capital for the growth of its economy and eradicate poverty in the country. Thus, state governments have to put efforts to effectively increase their revenue collection.